The Department of Labor has issued its much-anticipated final rule updating the salary thresholds necessary to exempt executive, administrative and professional employees from the minimum wage and overtime pay requirements of the Fair Labor Standards Act. The DOL also updated the total annual compensation requirement for “highly compensated employees.” The updates are more modest than the Obama-era updates that were issued in 2016 but subsequently blocked by a federal court in Texas.

The final rule, which goes into effect Jan. 1, 2020, makes the following three pertinent changes to the salary and compensation levels needed for workers to be exempt from overtime pay requirements:

  • Increases the standard salary level from the current $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year);
  • Allows employers the option of using nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level so long as these are paid at least annually; and
  • Increases the total annual compensation level for “highly compensated employees” from the current $100,000 per year to $107,432 per year.

The updates related to highly compensated employee include two notable wrinkles. The highly compensated employee must receive at least the new standard salary level of $684 per week on a salary or fee basis, exclusive of nondiscretionary bonuses or incentive payments. And, where a highly compensated employee does not make enough in nondiscretionary bonuses or incentive payments in a given year to retain exempt status, employers are permitted to make a “catch-up payment,” within one pay period of the end of the 52-week period, to make up for the shortfall. This payment, moreover, may not exceed 10 percent of the required salary level.

Significantly, unlike the Obama-era updates, the DOL’s final rule does not include automatic updates to the new salary thresholds. Instead, the DOL intends to update the salary thresholds with greater regularity than in the past, using notice-and-comment rulemaking.

The DOL claims the rule will impact more than 1 million workers. For those employers with workers whose salaries are at or below the new threshold, they will be faced with evaluating the pay structure of those employees going forward. While legal challenges to the new rule are widely anticipated, employers should start planning for how they will handle the impact of the new rule’s increases.